During our recent work with C-level executives and Directors, we found more focussed discussion on the topics of trust and fidelity, the cornerstones of fiduciary duty.

In the Australian financial advice space, there has been extensive focus on a compliance regime, thanks to the Royal Commission. The trend of increasing enforcements by the ASIC is expected to continue as the regulator cracks down on dishonest conduct and misleading statements. This raises an interesting question about the fiduciary responsibilities of financial advisers.

While compliance reflects adherence to the statutory rules, fiduciary duty is the trust and reliance placed in the fiduciary by the client, as is common where retail clients consult professional service providers for advice. Not every interaction between an adviser and client will be fiduciary in nature and not every action undertaken will have the protection of fiduciary duties.

In this article, we will look at some of the industry research on the fiduciary duties of officers and will outline a few key questions to think about on matters of systems and processes with respect to fiduciary responsibilities.

Fiduciary Duty of Directors in Australia1

One of the four basic duties of every Director is to exercise “Good Faith” – This duty requires a director to act in good faith in the best interests of the company and for a proper purpose (s 181), including to avoid conflicts of interest, and to reveal and manage conflicts if they arise. This is a duty of fidelity and trust, known as a ‘fiduciary duty’ imposed by common law and a duty required in the Corporations Act 2001 (Cth) (“Corporations Act”).

The difference between Fiduciary duty and Fiduciary obligation2

A fiduciary duty is the legal term describing the relationship between two parties that obligates one to act solely in the interest of the other. The party designated as the fiduciary owes the legal duty to a principal, and strict care is taken to ensure no conflict of interest arises between the fiduciary and his principal.

A fiduciary obligation exists whenever the relationship with the client involves a special trust, confidence, and reliance on the fiduciary to exercise his discretion or expertise in acting for the client. The fiduciary must knowingly accept that trust and confidence to exercise his expertise and discretion to act on the client’s behalf. In most cases, no profit is to be made from the relationship unless explicit consent is granted at the time the relationship begins.

Fiduciary Duties of Australian Financial Advisers

A fiduciary duty can arise at general law in several relationships which are traditionally recognised as giving rise to such duties3 . Examples of such relationships include that between trustee and beneficiary, agent and principal, director and company, solicitor and client, and at least in some circumstances, an employee and his or her employer.

A fiduciary duty may also arise within a fact-based (or “ad hoc”) fiduciary relationship, in the circumstances of the relationship as is the case in relationships between an adviser and their client. If there were any doubts of the existence of a fiduciary duty of financial advisers to their clients, it was addressed in Sec 7.7 – 7.7A and 7.9 of the Corporations Act as part of the Future of Financial Advice.

Broadly speaking, a fiduciary is required to act with undivided loyalty towards the beneficiary of the fiduciary duty in performing the duty. There are four main categories of conflict of interest that exist in this context that are governed either by the General law or by the Corporations Act.

1. Duty to avoid a real and sensible conflict of interest

2. Duties to act efficiently, honestly and fairly and to manage conflicts of interests

3. “Best interests” duties

4. Duty to prioritise client interests

A detailed report by Thomson Reuters (Professional) Australia4 highlights an interesting aspect of the relationship between financial advisers and clients. The authors note that there is “substantive advice” that concerns the recommendations by the financial advisers about actual investment decisions / strategies and is generally covered by compliance. However, they call out the process prior to the provision of substantive advice, referred to as “the advice about advice”. It is the initial consultation period wherein a retail client has approached a financial adviser for a conversation on a wide range of topics. The adviser may then choose to provide advice about a specific topic that may not be in the client’s best interest. This process may not be covered by the statutory disclosures because there is no formal agreement as yet but will fall under the purview of fiduciary obligations.

Breaches in Fiduciary Duty

Breaches of fiduciary duty typically happen when a fiduciary relationship is in effect at the time in question and actions are taken, which are contrary to the interests of the client. The actions are often somehow in the fiduciary’s own self-interest or the interest of a third party. A breach can also be the failure to disclose pertinent information to the client (such as a conflict of interest).

Section 1318 of the Corporations Act provides some protection for company officers against the consequences of a breach of duty in limited circumstances.  However, a report5 reviewing 23 relevant cases between Jan 2001 and Sep 2008 summarised their findings as below:

– Cases where relief granted: Zero Cases

– Cases where relief was partially granted: Three

 Cases where relief was refused: Twenty

 

The main reason for the refusal to grant relief is the failure to show that the company officer acted honestly. Other reasons include a lack of evidence or a failure to prove that the company officer ought fairly to be excused. The onus to “prove” a fiduciary acted in the best interest of the stakeholder rests on the fiduciary with the need to substantiate with ample evidence.

 Cases where relief was refused: Twenty

 

The main reason for the refusal to grant relief is the failure to show that the company officer acted honestly. Other reasons include a lack of evidence or a failure to prove that the company officer ought fairly to be excused. The onus to “prove” a fiduciary acted in the best interest of the stakeholder rests on the fiduciary with the need to substantiate with ample evidence.

Summary

The aim of this article is to highlight the nuances between statutory duty and fiduciary duties / obligations, particularly for financial advisers. The following questions will help you evaluate your processes and systems as you think about your fiduciary responsibilities:

1. Are you aware of your fiduciary duties and obligations in light of this article?

2. How good is your record keeping? Do you focus only on key documents or have ample evidence of a long-term professional relationship?

3. What is your record keeping system? Is it spread all over emails, drives, texts and hard copies or just on internal systems? Do you have a shared version of truth with your clients?

4. Is anyone else managing these on your behalf such as an outsourced provider or contractors? If so, do you have access to all the relevant records?

5. Do you conduct a periodic audit of the records to ensure they are up to date and are not accidentally deleted / lost?

The need to maintain all forms of client communication in a single place to which the client has access is becoming increasingly important.  While internal systems are well designed for managing statutory needs, client management systems are still a nascent concept.  These tools increase the transparency of your interactions with the client and provide a strong foundation for having a single version of the shared truth.  Therefore, mitigating a risk of a fiduciary breach while increasing client satisfaction.

– Sandeep Rao
CEO, Bondle Australia

We have relied on secondary research to collate information and have referenced them as appropriate.


Sources:

  1. General Duties of Directors,
    Australian Institute of Company Directors
  2. Investopedia – https://www.investopedia.com/ask/answers/042915/what-are-some-examples-fiduciary-duty.asp
  3. Equitable and statutory regulation of
    conflicts of interests and duty (May 2016) – http://www.supremecourt.justice.nsw.gov.au/Documents/Publications/Speeches/2016%20Speeches/Black_20160510.pdf
  4. Thomson Reuters (2014) 32 C&SLJ
    527 – Fiduciary obligations, financial advisers and FOFA by Simone Degeling and
    Jessica Hudson
  5. https://law.unimelb.edu.au/__data/assets/pdf_file/0006/1709772/58-stevenwong_essay_6_May_20091.pdf